Has the 16th Finance Commission sidelined the States?, Pg9

Key Highlights:

• The 16th Finance Commission (FC) maintained the vertical devolution rate at 41%, the share of states in the divisible pool of central taxes.
• The divisible pool excludes cesses, surcharges, and collection costs, impacting the total shareable revenue for states.
• From FY15 to FY22, the Centre's collection from cesses increased from ₹44,688 crore to ₹3,52,650 crore, and surcharges rose from ₹15,702 crore to ₹40,758 crore.
• 18 states have requested an increase in vertical devolution from 41% to 50%, while the Centre has advocated for moderation.

Detailed Insights:

• The divisible pool's share in the Centre’s Gross Tax Revenue has remained below 90% for the sixth consecutive year, contrasting with over 93% between FY13 and FY18.
• The Finance Commission acknowledged the rising trend of the Centre relying on cesses and surcharges, which reduces the divisible pool available to states.
• States argue that the Centre's increased reliance on cesses and surcharges disproportionately benefits the Centre at the expense of states' fiscal health.
• The Finance Commission suggested a mutual agreement where the Centre voluntarily transitions revenue collection from cesses and surcharges back into the divisible pool of regular taxes.
• States are concerned that the current distribution does not adequately address their constitutional responsibilities and fiscal needs, leading to demands for a larger share.

Key Concepts Involved:

• Vertical Devolution: The distribution of tax revenue between the Union and State governments.
• Divisible Pool: The portion of central taxes that is shared with the states.
• Cesses and Surcharges: Taxes levied by the Union government for specific purposes, not part of the divisible pool.